As another year winds down, high net worth individuals should be reviewing their wealth plan as they look forward to 2023 and beyond. We will be reviewing three items you should be considering as you plan.

Be strategically charitable

Americans are some of the most philanthropic people in the world. In 2021 Americans gave a total of $484.85 billion to charity, according to the National Philanthropic Trust. Moreover, Americans have access to numerous tools and strategies that can help maximize the benefits of their charitable giving.

Sometimes simply cutting a check to the charity of choice is the right way to go. But far more often strategically planned charitable gifts can increase the effects of the gift, allow more control for the donor to direct the use of the gift, and maximize the tax benefits of philanthropic giving. Instead of giving cash, donors should consider giving charities appreciated assets, such as stocks, bonds, and other investments. People who give investments can generally benefit from a charitable income tax deduction for the fair market value of the gifted assets, but avoid realizing taxable gain built into the value of the assets.

Also, instead of giving directly to an operating charity, donors should consider setting up their own charitable vessel to provide charities with on-going support. Some very wealthy people operate private foundations that provide a legacy of support for the charities they value, while also taking advantage of on-going tax benefits for themselves. Other individuals may be able to produce similar asset control and long-term tax benefits by establishing donor advised funds or charitable remainder trusts.  Charitably minded individuals should consult with their advisors for the best strategies to meet their charitable and tax goals.

Review life insurance and its purpose

Life insurance is an amazing financial product. It is the only investment that offers a guaranteed return, on an event that is guaranteed to happen, and with return proceeds that are free from income tax and—if properly structured—the estate tax. Moreover, contemporary life insurance products are tremendously flexible, often including features such as long-term care insurance riders and some tax-preferred market investment opportunities. But like most good investments, life insurance works best when it works for a purpose.

Life insurance generally requires an “insurable interest,” a defined need for the insurance. For instance, families with a primary income earner and a mortgage may choose to ensure the earner’s life so that the mortgage can be paid if he or she dies. Similarly, a closely held business may maintain insurance on a key partner so the business has some funds to adjust to a new situation if the partner dies. But people’s needs change over time and with them the need for life insurance.

Life insurance works best when it is regularly reviewed, especially in light of major life changes. If the family buys a bigger house with a bigger mortgage, it may be time for more insurance on the primary earner. Or if the closely held business welcomes more partners, ensuring the key partner may become less crucial. But people often put their life insurance on autopilot and do not think about it in the context of life’s changes. This may lead to being under-insured when a new financial need arises or to the costly maintenance of continuing insurance policies that are no longer needed at all. Everyone should pause from time-to-time to consider their insurable interest and work with an insurance provider to make sure that they have the right amount of insurance. The year’s end is an excellent time to review life insurance with an advisor.

Keep an eye on the calendar

There is no way to perfectly predict changes to the tax code. Tax rates, deductions, exclusions, and other provisions rise and fall with the crests and valleys of political waves. It is a fool’s errand to try to get in front of these waves and adjust finances accordingly. However, there is a major change to the tax code on the calendar, scheduled for January 1, 2026.

The last major changes to the tax code were passed in 2017 as the Tax Cuts and Jobs Act (“TCJA”).  While the TCJA made substantial alterations to the tax code, many of these changes were temporary and are set to expire on January 1, 2026. With the individual income tax, these expirations include the TCJA’s reduced income tax rates, the increased child tax credit, the increased AMT exemption, and the increased standard deduction. Indeed, most people are likely to see a substantial income tax increase in 2026.

Perhaps more crucial for high-net-worth individuals is the expected reduction of the gift and estate tax exemption. Currently, every American can shield $12.06 million from the federal gift and estate taxes.  This relatively large exemption amount will be effectively cut in half on January 1, 2026. Individuals who have not used their exemption amount through lifetime transfers may simply lose it, or at least half of it. As we approach the end of 2022, individuals should review their estate plan with their advisors to make sure it is maximizing benefits and minimizing taxes ahead of the coming changes.

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.